MAA250

Topic 8

Due Care and

Information Asymmetry

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 LEARNING OUTCOMES

• Understand the expectations and responsibilities of due

care from financial professionals.

• Understand the relevant codes and sections of FASEA

and APES110 in relation to due care and information
asymmetry.

• Resolve ethical dilemmas in relation to due care and

information asymmetry.

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RECAP TOPIC 5:
U N I Q U E F E AT U R E S O F A
FINANCIAL PROFESSIONAL

• Professionals develop the ability to diagnose a

situation and apply knowledge to come up with a
treatment to a problem.

• Professionals in a position of authority know

more than their clients who are dependent on
them, a fact that give rise to “professional
authority” – the professionals are in a dominant
position and the clients are dependent on the
professional’s decision.

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I N F O R M AT I O N A S Y M M E T R Y

• As a result of “professional authority” –upper hand in

knowledge, skills and others-resulting in information
asymmetry

• Information asymmetry arises:

o imbalance of information available when one party

to a potential contract is better informed than the
other party.
o as a result of unobserved and unequal distribution
of information

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I N F O R M AT I O N A S Y M M E T R Y

• Types of information asymmetry:

a) adverse selection- when one party in a potential

transaction has superior information regarding to
a relevant variable than the other party

b) moral hazard- the party with superior information

executes transactions that may lead the less
informed party to disadvantages

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I N F O R M AT I O N A S Y M M E T R Y

• Information asymmetry is the main concept of agency

problem

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 RECAP TOPIC 6:
CONFLICT OF INTEREST

• Principal engages agent to act on his/her behalf.

• Agent-Principal model assumes agents are sufficiently
motivated to act on principals’ behalf.
• Human nature- individuals are self-interested, resulting
in agency problem.
• Agency problem:
• agent fails (or is perceived to be likely to fail) to act in
the best interest of stakeholders because of the
existence of other interests.

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I N F O R M AT I O N A S Y M M E T R Y

• Hence, code of ethics necessary to ensure the problem of

agency problem (financial adviser- related party-clients)
could be minimized as much as possible.

• professional bound by formal fiduciary duties- must have

the competencies to conduct their duties appropriately
and in the best interests of those who depend on them

• Perform duties with DUE CARE- stipulated in FASEA and

APES 110

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FA S E A C O D E

• Standard 4-9 of FASEA provide guidance on due care to

clients
• Fundamentally the standards are:
o Standard 4: Consent
o Standard 5: Best interests of the client
o Standard 6: Effects of client acting on advice
o Standard 7: Remuneration and benefits received by
financial adviser
o Standard 8: Record-keeping
o Standard 9: Advice in good faith

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FA S E A C O D E

Standard 4: Consent

“You may act for a client only with the client’s free, prior and
informed consent. If required in the case of an existing client,
the consent should be obtained as soon as practicable after this
Code commences.”

• Essentially it requires financial advisers to be transparent with

the client and keeping them informed

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FA S E A C O D E

Standard 4: Consent

• Clear and simply explain to client that:

o what services will be provided; and
o the terms on which they will be provided; and
o the records that will be made of the services, and the
privacy and confidentiality arrangements applicable to
them.

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 Practice Case

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 Discussion Points
Does Shelia need to clarify the difference
between general and personal advice? Why
or why not?

Is it Ahmed’s responsibility to inquire these

differences? Why or why not?
Can the signed waiver protect Shelia if
Ahmed faces losses due to not
understanding the advice?
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FA S E A C O D E

Standard 5: Best interests of the client

“All advice and financial product recommendations that you

give to a client must be in the best interests of the client and
appropriate to the client’s individual circumstances.”

• Relates to FASEA values of ‘competence’ and ‘fairness’

• Relates to Standard 2- “best” interest of client (See Topic 7).

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FA S E A C O D E

Standard 5: Best interests of the client

• emphasises the importance of the client properly

understanding the advice and recommendations given and
their implications.

• Requires client to understand:

o the advice and recommendations given; and
o the benefits of the recommended products; and
o the costs involved; and
o the risks involved in acquiring, holding and disposing of
the recommended products, and
o how financial adviser recommends they be managed.
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 Practice Case

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 Discussion Points
Is a detailed document appropriate to
minimise information asymmetry in call
cases?

Should Frank consider reducing the detail

and length of the document? What are the
risks of doing so?
Can Frank take any measures to make the
existing template more effective?
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FA S E A C O D E

Standard 6: Effects of client acting on advice

“You must take into account the broad effects arising from the
client acting on your advice and actively consider the client’s
broader, long-term interests and likely circumstances.”

• Relates to Standard 2- but draws attention to

o the broader, long-term interests and likely circumstances
of client

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FA S E A C O D E

Standard 6: Effects of client acting on advice

• Requires adviser to consider broadly, including matters that
are:
o Not limited to client but also family members of client
o reasonably foreseeable events (pending recession, etc).
• Good advisers deal with the broad effects of advice by
considering the ‘phase of life’ in which a client is making
decisions — adjusting options to accommodate each client’s
circumstances.

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 Practice Case

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 Discussion Points
Should the family accountant have
considered the long term consequences of
their advice or was simply making the best
decision at the time sufficient enough?
Explain how far should financial advisers
think ahead when providing advice even
with waiver and disclaimers in place.

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FA S E A C O D E

Standard 7: Remuneration and benefits received by financial

adviser

“The client must give free, prior and informed consent to all benefits you
and your principal will receive in connection with acting for the client,
including any fees for services that may be charged. If required in the case of
an existing client, the consent should be obtained as soon as practicable
after this Code commences.
Except where expressly permitted by the Corporations Act 2001, you may
not receive any benefits in connection with acting for a client, that derive
from a third party other than your principal.
You must satisfy yourself that any fees and charges that the client must pay
to you or your principal, and any benefits that you or your principal receive,
in connection with acting for the client are fair and reasonable and represent
value for money for the client.”
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FA S E A C O D E

Standard 7: Remuneration and benefits received by financial

adviser
• 3 highlights:
o Quality of consent
o Source & types of remuneration/benefits, fees
o Charges are “fair and reasonable” and “value for
money”

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FA S E A C O D E

Standard 7: Remuneration and benefits received by financial

adviser
• Quality of consent
o Consent must be free, prior and informed
 Free- consent is given willingly and free
from duress
 Prior- consent given in advance by client
prior to action taken
 Informed- consent by client based on clear
understanding of what is proposed
and implications of the agreement

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FA S E A C O D E

Standard 7: Remuneration and benefits received by financial

adviser
• Sources & types of remuneration/benefits, fees
o Prohibits any benefits from third parties for acting for a
client, other than the adviser’s principal
o allow the receipt of benefits expressly permitted by the
Corporations Act-only can be received with the consent of
the client and do not give rise to a conflict of interest or
duty under Standard 2 of the FASEA Code.
o Benefit is not limited to monetary, includes goods and
services (meals etc)

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FA S E A C O D E

Standard 7: Remuneration and benefits received by financial

adviser
• Charges are “fair and reasonable” and “value for money”
o Up to adviser to determine- but must be defendable using
“reasonable person” test (see Standard 3)
o Industry/ peer practices would be a guide.

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 Practice Case

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 Discussion Points
Should Alasdair be entitled to the referral
commission as fair compensation for their
work? Why or why not?

Should Alasdair be more involved in the

research of property to be entitled to a fair
pay?
Is there a conflict of interest in this
situation?
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FA S E A C O D E

Standard 8: Record-keeping

“You must ensure that your records of clients, including former

clients, are kept in a form that is complete and accurate.”

• Advisers are required to maintain complete, accurate, reliable,

and timely records of their practices and keep them securely

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FA S E A C O D E

Standard 8: Record-keeping
• Objectives
• As an evidence to protect both advisers and clients if
necessary
• Assist in effective transfer of client’s matters to new
adviser when required

• Example of documents:
• Statement of advice (SoAs)
• Records of Advice (RoAs)
• Product Disclosure Statement (PDSs)
• Records of client communications, meetings, phone calls
• Records of advice development process.
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 Practice Case

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 Discussion Points
What can Sasha do to ensure that her
clients are taken care of after she changes
her job?

Does the duty of care towards her past

client end as soon as she changes her job?

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FA S E A C O D E

Standard 9: Advice in Good Faith

“All advice you give, and all products you recommend, to a

client must be offered in good faith and with competence and
be neither misleading nor deceptive..”

• directly linked to the FASEA value of ‘competence’.

• advisers must act in the “best” interest of clients, long-term
interests and likely circumstances of the client in giving advice
& making recommendation.

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 Practice Case

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 Discussion Points
Would the adviser have behaved differently
if recommending the product attracted a
bonus commission?

What difficulties the adviser could have

faced for admitting that they didn’t
understand the product? Would their
employer have judged their competency?

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APES 110

• Like FASEA Standard 4-9, APES 110 Part 2 Section 220, 230,
240, 250 / Part 3 Section 330, 340, 350 provide guidance on
due care, but focusing on accounting profession.
• In providing guidance for fulfilling the responsibilities of
maintaining due care, the code outlines key steps to navigate
issues that could impede on proper due care, as well as the
core values to guide the pursuance of these steps.

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APES 110

APES 110 Part 2 Section 230

• It deals with acting with sufficient expertise
• An accountant must only undertake tasks that s/he has
sufficient specific training or experience, not mislead employer
as to the level of expertise possessed & seek expert advice and
assistance when required.

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APES 110

APES 110 Part 2 Section 230

• Examples of threat to professional competence and due care:
o Insufficient time for properly performing or completing the
relevant duties.
o Incomplete, restricted or otherwise inadequate
information for performing the duties properly.
o Insufficient experience, training and/or education.
o Inadequate resources for the proper performance of the
duties

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APES 110

As an additional note, Section 115 of APES110 also provides

guidance on how expertise is to be advertised.
• It deals with marketing professional services
• Accountants must not market services, achievements, or
products in a way that is inconsistent with that principle.
• Example:
o Make exaggerated claims for services offered,
qualifications possessed, or experience gained; or
o Make disparaging references or unsubstantiated
comparisons to the work of another.
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APES 110

APES 110 Part 3 Section 330

• It deals with fees and other types of remuneration received by
accountants
• Accountants must not quote a fee that is so low that it may be
difficult to perform the engagement in accordance with
applicable technical and professional standards for that price
(lowball), simply to have/keep clients.

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APES 110

APES 110 Part 3 Section 340

• It deals with gifts and hospitality
• An accountant or an immediate or close family member must
not accept gifts and hospitality from a client that could
ultimately influence the decision making of the accountant.

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APES 110

APES 110 Part 3 Section 350

• It deals with custody of client assets
• An accountant must not assume custody of client monies or
other assets unless permitted to do so by law

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APES 110

APES 110 Part 3 Section 350

• Accountant entrusted with client monies/other assets must:
o Keep such assets separately from personal or Firm assets;
o Use such assets only for the purpose for which they are
intended;
o At all times be ready to account for those assets and any
income, dividends, or gains generated, to any persons
entitled to such accounting; and
o Comply with all relevant laws and regulations relevant to
the holding of and accounting for such assets.
o Make appropriate inquiries about the source of such assets
and consider legal and regulatory obligations
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R E S O LV I N G R I S K S O F
N E G L I G E N C E A N D I N F O R M AT I O N
ASYMMETRY
• Resolution of risks arising due to negligence and information
asymmetry can be achieved with reference to:
o ethical theories (Topic 3)
o professional codes of conduct
o use of ethical decision making models (see Topic 4 and
Topic 6)

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ISSUES TO CONSIDER

•Being competent and skilled at one’s duties at all times in order

to avoid negligent behaviour.

•Taking full responsibility for the quality of the service provided.

•Providing the best service to clients and in their best interests.

•Being transparent with the client and protecting any information

relating to their interests.

•Being honest and transparent in how they are remunerated by

clients.

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 CASE STUDY
E L I L I L LY

A controversial case of marketing drugs to targeted populations involving the

drug Strattera, Eli Lilly’s prescription medication that controls attention deficit
disorder and hyperactivity (ADHD) in children.  The ad ran in magazines such
as Family Circle (September 2003) under the simple title “Welcome to
Ordinary.” The ad pictured two boys holding up a model airplane that they
have finished building, a challenging task for a child with ADHD. The ad reads:
“4:30 p.m. Tuesday. He started something you never thought he’d finish. 5:20
p.m. Thursday. He’s proved you wrong.” The ad suggests that, if a child with
ADHD is not “ordinary,” it is the parents who are “wrong” because all it
would take would be Strattera to solve their problem. The same issue of
Family Circle contained ads for McNeil Pharmaceutical’s Concerta and Shire
Pharmaceutical’s Adderall, the two major competitors to Strattera.

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 DISCUSSION POINTS

• What facts would you want to know before deciding this case?

• What alternative marketing practices were open to these companies?

• Who are the stakeholders of your decision? What is the impact of each
alternative decision on each stakeholder you have identified?

• What rights and duties are involved?  

• How would you decide the case? Would you primarily consider
consequences, or are important principles involved?

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